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Grading the Governors

As the economy heads toward recession, the nation’s governors
will need to decide how to close rising budget gaps. Some governors
will decide to scale back spending to balance their budgets; others
will push for tax increases.

These sorts of taxing and spending decisions are tallied in the
Cato Institute’s latest fiscal “report card” on U.S. governors.
Each state’s chief executive was assigned a grade from A to F based
on the sanity of their fiscal policies in recent years.

Three governors earned an A for their efforts to restrain
spending and cut taxes. Charlie Crist of Florida has trimmed the
state budget and supported two large property-tax cuts since taking
office last year. Mark Sanford of South Carolina cut income taxes
and has pushed to impose a cap on state budget growth. Joe Manchin
of West Virginia passed major business tax cuts, including
repealing the franchise tax and cutting the corporate income-tax
rate.

Bill Richardson of New Mexico, Jon Huntsman of Utah, and Dave
Heineman of Nebraska also pursued pro-growth tax cuts, but their
mediocre spending records dragged down their grades to a B. Other
recipients of B grades - such as Tim Pawlenty of Minnesota - had
good records on spending, but their support for substantial tax
increases pulled their grades down.

Rick Perry of Texas and Mitch Daniels of Indiana also received
Bs. They had good records on spending, but they passed large
state-level tax hikes. Those hikes were swapped for local property
tax cuts, but this sort of tax swap is bad policy because it
centralizes fiscal power and reduces tax competition between local
jurisdictions. The result in the long run will be bigger government
and higher overall taxes.

Governors such as Arnold Schwarzenegger of California received a
C. Like some other governors in the middle, Schwarzenegger has
followed an erratic fiscal course - changing direction to suit the
mood of the public and the legislature has changed. Schwarzenegger
has resisted some tax increases, but he has proposed other large
tax hikes himself. While he restrained spending in his first year,
he signed off on big budget increases in others; California’s
general fund budget jumped 27 percent between 2005 and 2007, for
example.

At the bottom of the report card rankings, the F governors were
not erratic - they consistently sought to increase taxes and
spending. Illinois Gov. Rod Blagojevich, for example, proposed a
massive $6 billion hike in gross-receipts taxes on businesses.
Maryland’s Martin O’Malley enacted a sweeping $1.4 billion tax
package that increased the corporate income tax rate, the top
personal income tax rate, and the sales tax rate. The other six F
governors - Ted Kulongoski of Oregon, Chet Culver of Iowa, Jon
Corzine of New Jersey, Bob Riley of Alabama, Jodi Rell of
Connecticut, and C. L. “Butch” Otter of Idaho - also proposed or
enacted large tax hikes.

Aside from the poor performance of many governors, the report
card reveals some disturbing fiscal policy trends. For one thing,
there has been a dearth of pro-growth tax reforms in recent years.
The vast majority of governors have favored special-interest tax
breaks - such as tax credits for filmmakers and refundable tax
credits for individuals - over income-tax rate cuts that benefit
all citizens by spurring long-term economic growth.

Few governors seem to
realize that the states are competing in the global economy for
job-creating capital.

Few governors seem to realize that the states are competing in
the global economy for job-creating capital. Corporate tax rates
have plunged around the world, but the average state corporate
income tax rate is the same now as it was two decades ago. While a
few governors, such as Democrat Joe Manchin, have cut business
taxes, many others, such as Republican Rick Perry, have presided
over large, job-killing tax increases on business.

Another disturbing trend is soaring state and local government
debt, which has increased 83 percent this decade to over $2.2
trillion. At the same time, state pension and retiree health care
plans are underfunded by more than $2 trillion, and that figure is
rising. Hopefully, the governors will heed the Wall Street debacle
and begin scaling down their costly borrowing binge.

With all the economic challenges facing families and businesses,
America needs men and women in their statehouses who will restrain
spending, pay down debt, and pursue tax-rate cuts that spur growth.
The new governors who come into office after the election should
look to the economically - and politically - successful approaches
of Crist, Sanford, and Manchin.